Control your investment future03.11.2010

With a wide range of investment types available, having the correct mix in your portfolio to suit your individual circumstances and the current global climate is key to successful investing. Lifetimes looks at asset allocation and how investment managers can help you make the most of your money.

The concept of asset allocation is by no means a new investment philosophy. In fact its roots go back 2,000 years when ancient and sacred texts laid down guidance for individuals in the protection of their assets and capital. According to the Talmud, a central text of Rabbinic Judaism, an individual should invest one third of his or her money in land, one third in common stocks and one third in cash. A sound starting point perhaps, but today when looking at asset allocation we have a wider range of assets to consider when formulating an investment strategy to suit our individual circumstances, goals and attitude to risk.

There are different types of asset class, ranging from deposits which generally produce a low risk return and are predominantly linked to inflation, through to other classes such as property and equities and to hedge funds where returns are often independent of general market movements.

Holding different asset classes in your portfolio gives you the advantage of diversification. As not all asset classes move in harmony, poor performance in some parts of a portfolio won’t have a disproportionate impact on overall performance, as others will perform better in the same market environment. Changing the balance of your portfolio can create opportunities to make additional gains by being in the right asset type at the right time.

This might mean benefiting from a rise in bond values as interest rates fall, investing more

heavily in equities in times of economic growth or, conversely, when the economy appears to be on the downturn, adding hedge funds that aim to make gains as stock markets fall.

In some cases, investors believe that, over time, you can successfully predict market movements and profit from selling existing investments and buying them back when prices are lower. While this sounds fine in theory, ‘market timing’ becomes more of a gamble than a legitimate investment strategy and history shows that trying to time the market more often than not results in poorer returns than if you had stayed invested. With some of the greatest gains coming directly on the back of bear markets,

it is not always easy to predict the best time to buy back the investments and you could miss out on the market upturn. A more sensible option, perhaps, may be to make your strategic asset allocation decisions and stick to them until your circumstances change.

Of course, selecting the correct mix of asset classes is not the be all and end all of successful

investing. Due consideration needs to also be given to how you split the investments by geographical region and industry sector. Clearly this is a dynamic investment process and one that you may want to discuss with your Financial Adviser.

Further still, there is the selection of specific equities, funds and other assets, a job also most likely to be taken by the investment managers of the funds you are holding. At the end of the day, you, your financial adviser and the investment managers all have a part to play and need to regularly review overall investment balance.

Similarly, as markets evolve and your personal goals and circumstances change, it is important that you maintain a suitably balanced portfolio– one that is not correctly balanced may not deliver maximum return. Having the right mix of stocks, bonds and cash and other categories such as commodities, property, currencies and hedge funds is essential for successful wealth accumulation. That is why meeting regularly with your Financial Adviser is so important as they can help you determine an asset allocation that is appropriate for you.

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